On July 18, the federal Liberal government announced drastic and far-reaching changes to the tax system affecting private corporations. Although many have voiced their opposition to the measures, a significant portion of the population believe they are justified and necessary.

There appears to be a perception that high-income earners are somehow using corporations to gain an unfair tax advantage and the government is simply closing loopholes that are being exploited by an entitled minority.

The sad reality is that the proposed measures are very broadly worded, unfair and ill-conceived. They have far-reaching ramifications for virtually every small business owner in this country and his or her family. They also send the wrong message to the Canadian public.

When income is earned through a corporation, it is subject to tax twice: once when earned by the corporation and then again when those earnings are accessed by the shareholder as a dividend.

In order to compensate for this, the Tax Act sets out a complicated system involving certain refundable corporate taxes coupled with tax credits to individuals receiving dividends. The purpose of these rules is to ensure that the same amount of tax is paid whether or not a corporation is involved in the earnings process. This is necessary to ensure that entrepreneurs who need to limit their civil liability by using corporations are not unduly penalized by the tax system. This policy is known as “tax integration.”

The July 18 measures will result in higher levels of tax where income is earned through a corporation, in some cases above 70 per cent. This shifts an unfair and unequal tax burden to small business owners.

Government statements have suggested these measures are targeted exclusively to a few high-income individuals who have chosen to incorporate solely for tax avoidance reasons. In fact, they will apply to all corporations and impose higher levels of tax on families whose livelihoods depend on earnings generated through small businesses.

More often than not, small business is a family affair. Individuals who create and run small businesses invest their life savings, mortgage their homes, work nights and weekends and put their hopes, dreams and lives into making them grow. Family members — more often than not, women — need to contribute more on the home front to make up for the absence of the entrepreneur. The July 18 proposals disregard these contributions and only value time spent in the business itself.

Moreover, the proposals specifically disadvantage those who want to leave a family business to their children. That is, it will result in higher income taxes if they sell their company to their children than if they sell it to a stranger.

This is bad policy for families and antithetical to Canadian values.

There are many instances of unfairness in the tax system. When citizens owe money related to taxes, they are charged five times the rate they receive when they are owed money. Furthermore, in a progressive tax system — that is, one in which higher tax rates apply to higher levels of income — a businessperson, whose income fluctuates drastically from year to year, will pay more income tax than a wage earner who earns the same total income over a multiple year period, but in level annual amounts.

The government is silent on these matters. Its idea of “fairness” appears to be code for “increase in taxes” rather than a sincere effort to address inequality.

Finally, there is something disturbing about the way the government in promoting its position. It is characterizing those who oppose the changes as the entitled few who are unwilling to bear their fair share of the tax burden. In fact, what is intolerable is the implication that you have been a tax cheat simply because you have chosen to arrange your affairs so as not to pay the maximum amount of income tax.

Puneet Mehta is a chartered professional accountant based in St-Laurent.

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